As the market share of equity trading in European dark pools falls to its lowest level in a year, several European banks are looking to shore up confidence in the off-exchange venues by hiring independent consultants to audit information given to clients.

The move comes as the New York Attorney General is pursuing a civil suit against Barclays, alleging the UK bank misrepresented the way it operated its US dark pool, LX. Barclays has said it is examining the matter.

Once hailed as a solution to allow institutional investors to trade large orders without moving the market against themselves, dark pools have faced criticism for their lack of transparency – as well as adverse publicity in the shape of Michael Lewis’s book Flash Boys.

Financial News reported this month that the legal action over Barclays’ US dark pool had caused clients to disengage from its dark pool in the UK.

Fred Ponzo, managing director at consultancy GreySpark Partners, said: “Banks have hired auditors to independently audit their dark pools, to be able to assure their clients that their dark pools are not conflicted and are safe to trade on. We have been working on a few such projects.”

A senior executive at one European bank said it had “mooted” bringing in consultants to review its dark pool, mainly to “rubber-stamp processes, how we classify client types, and ensure the pool is represented to clients in an appropriate way”.

Analysis by US broker Rosenblatt Securities shows that around 4.9% of trades in European equities took place on dark pools during May. This was the third month in a row that dark pools’ share of overall equity trading fell, the broker said. It was the lowest level since May 2013.

The total average daily value of trades in dark pools fell 6.4% in May from the previous month, to €4.3 billion per day, while total European trading declined less, down 1.2% to €88.5 billion per day over the same period.
Rosenblatt said the depressed market share was due to seasonal factors, but others argue that the dip may be due both to a decline in equities volumes and recent regulatory scrutiny on dark pools, which has made the fund managers more wary.

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Rebecca Healey, a senior analyst at research house Tabb Group, said: “Increasingly, buyside participants have been monitoring the performance of dark pools. So it’s not dark pool trading per se that is in decline but the type of activity and the type of dark pool that is declining.”

However, one senior dark pool executive at a large broker said the slump was mainly the result of lower volumes in secondary equities markets and not specific changes in dark pools.

He said: “Secondary markets volume as a whole have slumped, that is probably the bigger driver. There is a lot of IPO activity going on, so when people have cash they are putting it there.”
In Europe, new rules in the second version of the Markets in Financial Instruments Directive are expected to cap the volumes of transactions that can be conducted in dark pools.

Rosenblatt includes data from dark pools operated by investment banks, including Barclays and Credit Suisse, as well as those run by exchanges including the London Stock Exchange, Six Swiss Exchange and Bats Chi-X Europe.